Big is Beautiful

An article contributed by Aatif Khan on behalf of the Centre for Policy Studies

Here in Britain we all have the natural tendency to support the underdog. David versus Goliath, the rural community against the monolithic fracking company or the small and medium enterprises which can never be overly praised by our policymakers as job creators. But praising big business has been a no-go area for politicians of any stride, especially following the financial crisis. This is in spite of the role they play in increasing not only our living standards but of increasing opportunity in the emerging and developing world.

Through the eyes of the anti-globalist and much of the Left, the presence of large multinational firms is a threat to be overcome. They’re the ones who take advantage of individuals, pay people a meagre salary and force governments to adopt regulation complicit to their interests.

Now, it is true in many instances that large corporations do morph into bureaucratic bodies which can make them uncompetitive in the modern world, but a free market disciplines firms and forces them to adapt to changing market demands otherwise they go bust. Kodak is a good example of this: a market leader which dominated photographic film technology, but by the late 1990s couldn’t adjust to the transition towards digital photography despite developing the core technology it uses.

And it’s also true that businesses will use the government, when they can, to force competition out the market and consolidate their position in the market. But that’s a government failure because free markets destroy monopolies, government regulation creates them by privileging some companies over (usually) smaller ones. Crony capitalism has bailouts and subsidies, free markets don’t. Free markets are a system where even the most selfish person is compelled to act in the public interest by producing what somebody else wants.

An advantage big businesses have is their ability to utilise economies of scale. Through this process, companies can be more productive, allowing firms to offer higher wages (domestically and internationally) and allocate resources to important long-term areas such as research and development.

Ford doesn’t need to use as much labour or money in producing motor vehicles as large firms can specialise in different areas of the production process, encouraging innovation and cost-saving techniques. However, a small workshop can’t specialise and has to charge a higher price. Big supermarkets, like Walmart, can bulk buy their goods and offer them at a lower price than local convenience stores since most small stores have to buy their goods at the wholesale price, which is usually higher than the supermarket retail price.

Speaking of Walmart, a common target of anti-business rhetoric, it’s not rare to see The New York Times run headlines (as it has) such as “Can’t Wal-Mart, a Retail Behemoth, Pay More?” or “Is Wal-Mart Good for America?”, taking punches at the supermarket giant. The benefits of big corporations, like Walmart, are often subtle.

In 2007, Global Insight, a leader in economic analysis, published a report[1] showing Walmart saves the average American household $2,500 per year, the equivalence of $957 per person. Note that this statistic includes American families which don’t shop at Walmart because the low prices offered by the retailer forces rival firms to lower their prices through competition.

George Will, in The Washington Post[2], showcased the upward mobility provided by McDonald’s franchising, stating ‘McDonald’s has made more millionaires, and especially black and Hispanic millionaires, than any other economic entity ever, anywhere’. Those who become rich from McDonald’s didn’t accumulate their wealth at the expense of others, but by providing a service which consumers value and are willing to pay for.

The benefits which markets can bring extend far beyond our shores, look past the horizon of Western debt-ridden nations with their unsustainable levels of spending and the thirst for greater exposure to free enterprise is, if anything, growing.

The Pew Research Centre undertook a huge global survey[3] of just under 50,000 respondents from 44 developing, emerging and advanced countries. It showed the belief in free markets tended to be highest in developing states, despite the increased inequality it would bring, people still recognised it as the best economic system to increase living standards. The prevailing view among emerging countries is the need for reduced taxation in order to encourage greater inward investment from foreign companies, not to increase taxes on the most productive in society.

Martin Wolf, chief economics commentator of the Financial Times, accredited multinational firms for offering wages which are often higher than local competitors[4]. For example, Nike workers have a salary of $670 compared to the annual Vietnamese minimum wage of $134 and Nike suppliers are paid $720 compared to the Indonesian minimum wage of $241[5].

Big business isn’t perfect, but nor is small business. We’ll happily showcase ‘Made in UK’ on our dairy products which makes us feel mildly patriotic inside, but never on clothing made in Romania which gives us inexpensive clothes and offers the textile workers a route out of destitution. Big business is beautiful when it gives us cheaper goods, offers us higher wages and innovates new products, not when it cosies up to an overarching state and drafts up legislation impeding the self-regulatory mechanism of the market.

 

 

 

 

 

[1] Global Insight. (2007). The Price Impact of Wal-Mart: An Update Through 2006. Retrieved from http://www.rossputin.com/blog/media/WalMartSept2007.pdf

[2] Will, G. F. (2007, December 27). Lovin’ It All Over. Retrieved from The Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2007/12/26/AR2007122601485.html

[3] Pew Research Center. (2014, October 9). Emerging and Developing Economies Much More Optimistic than Rich Countries about the Future. Retrieved from Pew Research Center: http://www.pewglobal.org/2014/10/09/emerging-and-developing-economies-much-more-optimistic-than-rich-countries-about-the-future/#many-say-low-taxes-are-the-answer

[4] Wolf, M. (2001, Jan – Feb). Will the Nation-State Survive Globalisation? Foreign Affairs, 80(1), 178-190. Retrieved from http://www.jstor.org/stable/20050051

[5] Norberg, J. (2003). In Defense of Global Capitalism. (R. Tanner, & J. Sanchez, Trans.) Washington D.C: Cato Institute

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